We polled some of our export finance experts—Austrade’s Tim Harcourt, St George’s Andrew Currie, Westpac’s Alexander Cameron—for 10 tips to make sure you stay on top of your export finance.
We polled some of our export finance experts—Austrade’s Tim Harcourt, St George’s Andrew Currie, Westpac’s Alexander Cameron—for 10 tips to make sure you stay on top of your export finance.
Meet our panel of export experts:
• Andrew Currie, national head of trade finance, St George.
• Alexander Cameron, senior manager Product Development and Alliances, International Business, Westpac.
• Tim Harcourt, chief economist, Austrade.
1. Export products available
Andrew Currie
Funding for exports can come from a variety of sources, such as negotiated supplier terms, deposits, and down payments from buyers (such as cash or bank guarantees), government assistance (including pre-shipment finance guarantees from EFIC through your participating bank), and traditional borrowing lines extended by the exporters’ relationship bankers.
Commonly used bank products include letters of credit (L/C), confirmations and negotiations, documentary collections and negotiations, open account receivables discounting lines (full or limited recourse), structured pre- and post-shipment finance lines.
Despite the much publicised move to open account trading, a large number of exporters of all sizes continue to prefer the more traditional trade structures like letters of credit and documentary collections.
2. Choosing an export product
Andrew Currie
The most appropriate product needs to be selected on a case-by-case basis. Important factors to consider relate to the circumstances of the individual exporter, its industry position and relationship with the end buyer.
When weighing up the pros and cons of a finance structure the following should also be considered:
• Will the proposed facility result in a reduction in the availability of finance under existing lines through the use of shared security?
• What is the total cost of the funding (include all fees as well as interest cost)?
• Does the facility structure enable the elimination or effective management of Foreign Exchange exposure; is benefit extracted from existing natural hedges?
• Have all credit and sovereign risks been reduced to a level that is acceptable?
• Is the level of administrative burden associated with the finance structure acceptable?
3. Managing cash flow
Tim Harcourt
There are special considerations with exporting—dealing with exchange rates, country risk etc—but your bank and EFIC can provide you with options here, particularly with hedging for exchange rate fluctuations.
Alexander Cameron
There should be an integrated approach. Managing cash flow is critical to any business. When you’re trading internationally, an extended and more complicated trade cycle can put extra pressure on your working capital. For example, as an exporter there is likely to be a significant period between manufacturing and shipping goods and receiving payment.
Businesses achieving fast overseas export growth are not exempt from being cash poor, especially if their money is predominantly locked up in outstanding receivables. Either way,
exporters need to manage the risk of the working capital cycle to ensure that they have the resources to maintain a reliable export supply without having to draw on more expensive forms of capital. Careful business planning and well researched new market entry strategies should never be underestimated in the world of exporting.
4. Filling export orders
Alexander Cameron
Short-term bank finance can ease this pressure, and the most popular options are trade finance and foreign currency trade overdrafts. Exporters often find it tough to get started. You may need to purchase goods and services in order to manufacture a product for exporting. This is where pre- and post-shipment finance can help manage your cash flow.
Trade finance is designed specifically to provide short-term funding for international trade. Your bank can advise you.
5. Export research
Tim Harcourt
Undertake market research or get advice on who can do it for you.
Alexander Cameron
Seek advice where necessary. Use the expertise of your trusted business advisers and also your bank to help prepare your essential export contracts, cash flow forecasts, and strategy documents.
The first step to a successful export business is researching your target markets.
Factors to consider include:
• the overall political situation in the countries concerned
• government regulations, including restrictions on certain imports, quarantine and labelling standards
• demand for your product and the stability of that demand
• import duties and local taxes such as sales tax
• market penetration of your competition
• the cost of shipping your product and the frequency of the service
• ease of communication
• local laws and customs
• channels for sales and distribution
• resources you need to have in place to manage the associated record-keeping and documentation.
Austrade is an excellent source of market information, as are overseas embassies and the Chamber of Commerce and Industry, government departments, local directories and journals, and market survey reports. You can also obtain trade statistics from the Australian Bureau of Statistics.
In order to get a feel for the demand for specific products, you may find it helpful to visit trade fairs and exhibitions and, of course, to visit the country or countries you believe to have the greatest potential.
6. Export planning
Tim Harcourt
Talk to a bank or EFIC about your finances, and see Austrade about setting up a business plan and getting help with contacts (importers, distributors etc) offshore.
Make sure you have the capacity to meet the new orders. Supply can really create demand in many cases! Ensure you have strong logistical and financial support to prepare for any sudden increases in export orders. Most exporters, large and small, will build this into their business plan.
Andrew Currie
Normally, developing an export market takes longer and is a more complex process than expanding domestically. Prospective exporters should ensure that planning allows for potential lengthy delays in securing the export business.
Ensure that staff handling the payment process are adequately trained to deal with the more complex shipping and payment documentation. The Australian Institute of Export runs coaching courses on these topics, and trade specialist managers at the exporter’s bank are equipped to assist.
Alexander Cameron
Plan to reduce the risk of a working capital shortage.
Understand and consider your payment certainty. The method you negotiate can mitigate some of the risk associated with payment, particularly if you’re entering a new market, you are subject to a jurisdiction that may be more difficult than others or you’re dealing with a buyer not known to you.
Ensure you have an effective commercial contract in place. This can be simple as long as both parties understand the terms of payment and conditions. Also consider employing the services of an on-the-ground legal team so you can feel assured that you’re addressing all the regulatory requirements of the market.
Know your trade cycle and working capital requirements. Be sure to factor in the payment terms stipulated by your local suppliers with those negotiated with your overseas buyers to ensure you don’t run into a cash shortfall.
7. Neat negotiations
Andrew Currie
G
enerally, the better the exporter is at negotiating with its suppliers and buyers on payment terms, the smaller the funding gap that needs to be financed, and the lower overall cost of funding will be.
Ensure that the business takes advantage of assistance offered by government bodies such as Austrade and EFIC.
When considering the trade finance on offer, exporters and potential exporters should also take into account the access they will have to specialist support in the form of experienced specialist trade finance managers.
Ensure that the finance sought is flexible and that it provides for the issues that might arise from the cross border nature of the trade flow, such as the ability to accommodate late payment resulting from shipping delays and other events outside of the exporter’s control.
Exporters should also be comfortable with the trade finance provider’s ability to process shipping documents promptly and accurately, avoiding costly delays and ensuring that title to goods shipped is protected.
It is crucial that the customer involves their financial advisers and their bank’s relationship manager and trade finance specialist as early as possible in the negotiation/discussion process.
It is crucial that the exporter understands what finance will be available and under what conditions before commitments are made to prospective customers.
8. Understand risk
Andrew Currie
Letters of credit provide a degree of certainty around payment because the buyer’s credit worthiness is replaced by that of the issuing bank. Exporters dealing under letters of credit need to bear in mind the political environment in the country of the importer and the strength of the issuing bank itself. Where the exporter is uncomfortable with this risk profile it is prudent to ask its own bankers to confirm (guarantee) the letter of credit. The main issues here are the cost and complexity that this process imposes on both parties.
Alexander Cameron
Trading internationally carries a number of risks you would not have confronted while doing business within Australia. These include the consequences of political and economic instability; difficulties in chasing payment over thousands of miles, fluctuating exchange rates, and problems associated with transporting goods. However, thousands of businesses manage these risks and continue to trade successfully. The most effective strategy is to be aware of any potential risks and take sensible precautions to protect yourself.
Fluctuating exchange rates can have a powerful impact on your profits. As an exporter, you are exposed to foreign exchange risk from the moment you execute an order. There are a wide range of currency exchange management options to help you manage risk and protect yourself against adverse movements in a currency.
If your payments are received in a foreign currency, a foreign currency account could simplify your banking by removing the need to convert every transaction to Australian dollars. It can be used to manage foreign currency cash flows, to make advance provision for commitments in a foreign currency and to deposit or borrow funds. A foreign currency account can be conducted in most major currencies.
Alternatively, if you prefer to plan ahead, you can sell one currency amount and buy another currency amount at a fixed exchange rate on an agreed future date with a forward exchange contract. That means you know exactly how much you will receive for your exports even though the cargo may not arrive at its destination for some months. In this way, you can protect your business from adverse exchange rate fluctuations.
Consider taking out credit insurance. Know your customer and make key decisions around the payment risk associated with your particular buyer, market and industry.
It’s important to establish with your trading partner who has responsibility for arranging various insurances, and vital that you check for any gaps in the cover. Export insurance is also available to protect you from non-payment.
9. Mistakes to avoid
Andrew Currie
A common mistake is negotiating the contract and dealing with the finance and risk issues later. This can include entering into contracts that will strain working capital or agreeing to letters of credit that contain conditions that can’t be complied with.
It’s also about getting the contract right upfront and ensuring that there is clear agreement around simple issues such as which party will pay the freight, when control of goods passes from the seller, in what currency payment is to be made, when and how, who is responsible for insurance, what documents are required etc. All of these issues are important and require clarity upfront.
Trading partners often dislike lengthy contracts so there is sometimes a tendency to avoid detail, which can lead to costly assumptions and misunderstandings. We advise clients to be patient and thorough at the contract stage and to involve trusted advisers and specialist trade finance managers early, who understand the exporter’s business.
Alexander Cameron
Generally speaking, first time exporters underestimate the long lead times required to bring a deal to completion and the costs associated—the upfront investment in developing a new export market or business venture needs to be factored into the equation.
10. Get Export Advice
Tim Harcourt
Government support includes Austrade’s Export Market Development Grants (EMDG), Export Finance Insurance Corporation (EFIC), and Austrade Export Advisers can help you find the right products depending on your needs.
Alexander Cameron
Talk to people in the know. Most foreign embassies, high commissions and diplomatic missions in Australia have associated resident trade promotion organisations. Their aim is to promote economic and commercial links between Australia and their own country and, as a result, provide an excellent source of reference and advice. It can also be very helpful to talk to people with experience in exporting. Joining appropriate trade and industry associations will give you a chance to discuss a wide range of issues.
What you need
Assess your needs to work out what product best suits your needs.
|
As an exporter, you need… |
What product can help |
|
To be able to finance the production or purchase of goods for export before you receive payment. |
trade finance |
|
Conditional guaranteed payment from your buyer’s bank. |
export documentary credit |
|
To eliminate buyer, bank and/or country risk. |
export documentary credit – confirmations |
|
Your export proceeds to be collected on your behalf. |
export documentary collections |
|
To manage international cash and foreign exchange and transact in foreign currencies. |
onshore foreign currency accounts |
|
To manage foreign currency risk, protecting yourself from fluctuations in foreign currency exchange. |
forward exchange contract |
Source: Alexander Cameron, Westpac
Limiting Risk
At a time like now when the Aussie dollar is at a 17-year high, many exporters will be feeling the pinch. While there's no sure-fire way to pick where the market is going or the best
time to change currencies, there are a few tricks exporters can use to improve exchange rates and manage foreign exchange risk.
One of the simplest tools for maximising returns on forex transactions is called a limit order. Traditionally only available to large companies, limit orders are now available to small and medium businesses through foreign exchange brokers. A limit order allows you to place an order with a broker to exchange a certain amount of money when the dollar reaches a certain rate. This allows exporters to focus on running a business and not watching exchange rates.
Another tool for reducing FX risk is the Forward Exchange Contract (FEC). An FEC allows a company to 'lock in' today's exchange rate for transfer at a later date. Despite the fact the rate and amount to transfer are locked in, the deal does not have to be paid for until the later date, freeing up cash flow and removing the risk associated with the volatile FX market.
Source: OzForex
